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Loonie on the skids: Why the Canadian dollar could sink below 92¢ this week

These are stories Report on Business is following Wednesday, Jan. 8, 2014.

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Loonie sinks
The Canadian dollar could sink below the 92-cent mark by the end of the week depending on Friday's jobs report.

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The loonie, as the country's dollar coin is known, lost more than a penny yesterday and slipped even more today, sitting at about 92.5 cents by late in the day.

It's the lowest since the 92.14 cents marked in May, 2010.

The currency has been in decline for a year, down almost 7 per cent in 2013 and 2 per cent in a still young 2014. In the past two days alone, noted chief currency strategist Camilla Sutton of Bank of Nova Scotia, the loonie has lost 1.7 per cent.

The loonie, which just a year ago was a darling in the currency markets, has been eroding for several reasons, notably a dovish Bank of Canada, concerns about the country's oil exports, and questions about the economic outlook compared to that of the United States, whose dollar is on the rise.

Its troubles were compounded yesterday on a weak export showing in Canada and a stronger trade report from the United States, coupled with a soft Ivey purchasing managers index measure.

"To put it simply, the U.S. is importing a lot less from Canada," said Stephen Gallo, Bank of Montreal's European head of foreign exchange strategy.

All of which makes Friday a key day for the currency's fortunes.

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Economists expect the Statistics Canada employment report to show job gains of about 15,000 in December, though some expect fewer.

If it's well below what's expected, Mr. Gallo said, the loonie could tumble below 92 cents.

That's because it could suggest that the weakness in trade is pointing to weaker output and softer employment, which could, in turn, prompt markets to "price in" a cut in the Bank of Canada's benchmark interest rate.

Chief economist Douglas Porter of BMO Nesbitt Burns also cited the growing talk of a potential cut in the key rate, and projected the currency will fall below 91 cents.

"Friday's twin jobs reports could get us there fast," he added.

Mr. Porter was referring to the fact that the U.S. employment report will be released at the same time on Friday.

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"The strength of the USD is starting to tell against the CAD," added Sébastien Galy of Société Générale, referring to the American and Canadian currencies by their symbols.

"This is increased by evidence of the trade balance between the U.S. and Canada, suggesting CAD is too high," he said today.

"From a medium-term perspective it suggests that the terms of trades gains made by Canada for over a decade have left it less competitive in terms of the currency and domestic productivity as the growth environment was easier."

Scotiabank's Ms. Sutton, and others, expect a weak loonie over the next six months, before it perks up again. And they don't expect a rate cut.

"While market expectations for a rate cut haven't moved materially, dovish reports from the analyst community may be stoking such concerns," said chief technical analyst George Davis of RBC Dominion Securities.

Fed sees job gains
The Federal Reserve decided to scale back its monthly asset purchases in December as most members on its policy-setting panel saw improvement in the jobs market, minutes of the meeting show.

They also believed the results of the $85-billion (U.S.) of bonds, a stimulus program known as quantitative easing, or QE, were waning, our Washington correspondent Kevin Carmichael reports.

"In their discussion of monetary policy in the period ahead, most members agreed that the cumulative improvement in labour market conditions and the likelihood that the improvement would be sustained indicated that the committee could appropriately begin to slow the pace of its asset purchases at this meeting," said the minutes, released today.

"Many members judged that the committee should proceed cautiously in taking its first action to reduce the pace of asset purchases and should indicate that further reductions would be undertaken in measured steps," according to the document.

"Members also stressed the need to underscore that the pace of asset purchases was not on a preset course and would remain contingent on the committee's outlook for the labour market and inflation as well as its assessment of the efficacy and costs of purchases."

The minutes, said chief economist Avery Shenfeld of CIBC World Markets, illustrate how the size of the pullback, or taper, "appeared to be a compromise across widely ranging views of what was appropriate, although 'many' wanted to go cautiously."

Fairfax takes more of BlackBerry debt
Canada's Fairfax Financial Holdings Inc. is doubling its stake in Blackberry Ltd.., adding $250-million in convertible debt to the investment it has already made in the struggling smartphone maker, The Globe and Mail's Jacqueline Nelson reports.

Late last year Blackberry received an initial $1-billion in financing through a debt investment by Fairfax and a consortium of investors. The group had the option to make this secondary investment of $250-million within 30 days of the debt's issuance.

The terms of Fairfax's new investment match its previous investment. The convertible debt has a coupon of 6 per cent and can be converted into shares at $10 apiece in the future.

Europe's mixed bag
It's a mixed bag today in Europe, where consumer spending is picking up but unemployment remains at crippling levels in some countries.

The Eurostat agency reported today that retail sales in the troubled euro zone rose 1.6 per cent in November from a year earlier, and in the wider European Union by 2 per cent.

But jobless levels are still high, at 12.1 per cent in the monetary union and 10.9 per cent in the EU.

Almost 26.6 million people in the EU can't find work, more than 19 million of them in the euro zone.

Countries such as Greece and Spain are hobbled by jobless rates of about 27 per cent, while others such as Austria and Germany enjoy far lower unemployment of 4.8 per cent and 5.2 per cent, respectively.

Unemployment is even more troubling among young people, who are suffering jobless rates of about 24 per cent.

"The dramatic divergence between German and U.K. unemployment and unemployment everywhere else goes some ways to explaining the political tension in Europe at present over issues ranging from 'austerity vs. growth' to bank regulation," said Derek Holt and Dov Zigler of Bank of Nova Scotia.

In brief
Shares of Forest Laboratories Inc. surged today after it struck a $2.9-billion (U.S.) deal for drug maker Aptalis.

Facebook Inc. also reached a deal for Little Eye Labs, an Indian startup that enables developers to monitor and build up mobile apps for Android-powered devices.

A unit of China's Alibaba Group Holding Ltd., a large online market known as Taobao, is banning trades of bitcoin and other digital money.

L'Oréal SA has stopped selling its Garnier offerings in China just days after Revlon Inc. also quit the country.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More


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